Anyone who has worked in power sector knows the following exist and are for real - power project costs are " gold plated " such that the promoter's equity is zero - viz., typically overstated by 20-30 %.

The ROCE for the project on excel is invariably 5-6% higher than what it is in real life - because of delays, fuel linkages, corruption, environmental clearances, hafta, union issues, state government clearances and grid connectivity

the typical kick back to get money from state government in case of PPA's is 1-2 % on an ongoing basis - in states like TN, this is as high as 4-5 % as the discom is sick and often has to prioritize the scarce money left

Given all of this, I am not able to understand how people are bullish on PFC - ask any PSU banker and all of them will tell you that power is a big NPA sector.

Of course, it's a function of price - at Rs. 30-35, this can be a great value buy - but I am reasonably certain that there is a lot more than what meets the eye.

I personally feel that the market reaction was the extreme of pendulam swing. Few points to consider

Company had previously informed the exchange about the problem with the equity investment in the wind power company hence it was a fact known in the market.

Company has made provision of total 61.1 Crores for the year as diminution in value of its equity investment and has filed a criminal complaint against India wind in the matter.

Provision for Konaseema gas based power project- As clarified by CFO, it is till not an NPA however to be conservative on provisioning the company has made provisioning for the same. With Gas pooling finally taking place, the probability of the asset turning NPA has reduced.

CFO has also clarified that both these provisions are one time and are not likely to recur in coming quarters.

Few observations from my side- Since beginning company has been very conservative in making provisioning even for standard assets (they provide 0.5% instead of RBI mandated 0.3%) - Company's 35-40% assets are in renewable sector and are likely to form 50% of the assets going forward. Renewable sector has lower gestation period, lesser complexity and firm PPAs. Thus the risk profile of this sector overall is lower than typical fossil fuel power plants. - For 60 Crores of provisioning , market has discounted the value by 700 Crores (loss in market cap) - Company has been generating industry beating ROA (in excess of 3%) and has excellent CAR. It is not easy to find such combination.- Having worked in energy sector for last many years, I generally agree with Vardha's assessment. At the same time, I feel, these factors are present in all capital intensive sectors/projects. Also, in my experience, it is not prudent to put all lenders (even PSU lenders) in the same category as some of them are very methodical and have very robust due diligence process. Good lenders do look for good debt service coverage ratios (DSCR) under various sensitivity scenarios. Thus, as an investors,I prefer to be driven by company specific facts and not sector generalizations.- Having dealt with IFC before, I can say that they are as risk averse as one can get and have very elaborate process to evaluate risk. IFC tying up with company suggests that even the company has well established process for lending and risk assessment and may further improve the same based on IFC's inputs.- Even if company grows its asset base by 20% in FY16, the assets will be 7500 odd crores (current asset base is 6300 odd crores) and considering current NIM of 6.3% (which may go up if rate reduction cycle kicks in and IFC money starts pouring in) and average asset base of 7000 crores, NII will be around 440 Crores. Considering other income stay at the same level of 60 odd crores and current cost structure and provisioning norms, the PAT can be in the range of 250-275 crores.

My only query is that how do we know this is not the first of many cockroaches ? Please hear the commentary from PSU banks - steel and power are two sectors where their max. NPA's exist.

I had the same doubt at JK Bank -- I did some scuttle butt and found out that their credit norms were a running joke and plenty of people got loans forging papers - the bottom has fallen out soon enough.

On renewables, look at the RoE and ROCE - they are much poorer than thermal power plants - for eg., in wind, PLF, grid off take issues, power wheeling play a big issue.

In any leveraged play, I have noticed that, the first big bad quarter is followed by 4-5 quarters before things get better - case in point, the sub prime criss - big value investors like pzena called citibank etc. value buys in jan 2008 only to find their capital eroded by 100% by sept 2008.

All my friends in power sector say nothing has moved as yet given issues of coal linkages, land acquisition bill not yet passed and discoms in serious disarray. I want to be sure that this not a falling knife - can you find out a little more on the ground dhwanil ?

Also, bear in mind that the RS india wind investment was made in 2007 - and a full 8 years later, PFS found out it's a fraud - surely, they were not producing power for so long ? they never took even a partial write-off so far. Why ?

there is no clarification from the company on this - what took so long - 8 years is an eon. typically when you find a really old cockroach, he must have bred and produced a lot more.

I am looking to enter but want to be sure - hence, I am inverting and figuring out what can go wrong from here.

@varadharajanr I am in complete agreement with you that while dealing with financial companies, it is much better to be extra-cautious rather than complacent. I am only trying to make a point that the extent of knee jerk market reaction seems to be extreme, considering the facts that we have on the table at the moment. When market disproportionately discounts the fact on the table there are two distinct possibilities

1) The market knows much more about the situation that it meets our eye2) The market is not making an distinction between a specific case and the general trend. As you have mentioned may be market is thinking that this company too will follow the typical trend for financials in the past, where the asset quality worsening will continue in next few quarters and many more coffins will come out of the cupboards.

I agree with you that it will be prudent not to rely on management commentary and dig deeper to ensure that our own scuttlebutt /research supports/corroborate with the facts presented by management. At the same time, asking generic questions to industry folks may be misleading as we may again make generalized conclusion rather than relying on specific facts. I suggest we shall strive to do following 1) Compile a list of projects where PTC India Financial has a major lending exposure and assess each project on various risks (delay in completion, cost overrun, fuel linkage, power sales, receivable delay/default) 2) Review the equity investment and also assess all these risks 3) Assess the restructured loan book for the company and see if the re-structuring is for real of just and eye wash

Any alternate suggestions are welcome.

I know it is not an easy task, however, I am sure with concerted effort we can do this.

If we are able to reject our hypothesis (There are many more cockroaches there) with data points, I smell an excellent opportunity here.

@desaidhwanil - an easier way would be to catch hold of ex-employees. We will never ever be able to make a roster of information that is purely inside PTC. Often subtle pointers like focussing only on collections, going slow on disbursments are indications that there is more to the rot

And if they are concentrating on renewables which traditionally have had lower ROCE than thermal, what gives them confidence that this will be more profitable - look at several cases like indo wind, moser baer solar etc. Most of these suffer from the same counterparty risk of discoms - if a discom can't pay Rs. 4/unit, they will struggle equally to pay Rs. 8/unit.

If we can get 1-2 IAS officers, power secretaries, things will become clearer.

Will not make any further investments in equity in any projectsPTC India Financial Services (PFS) held its analyst meet on 29th May 2015 and was addressed by Pawan Singh Whole Time Director & CFO and Ashok Haldia Whole Time Director & CFO

Key highlights

Currently, Renewable account for about 39% of total loan book, with
about 80% of the renewable loan book being wind power and remaining
solar power.
While the loan sanctioned during the year FY'15, grew by about 60%
to Rs 4112 crore on YoY basis, loan disbursement in FY'15 stood at
Rs 2493 crore as against Rs 3071 crore for FY'14. Lower disbursement
is as a result of slower progress of government policies on
renewable front. However, the policies are getting clearer and
management expects disbursement growth to pick up strongly in FY'16.
Total cumulative loan book as on Mar'15 stood at around Rs 6379
crore as compared to Rs 5883 crore for Mar'14. About 39% is from
renewable, about 32% is from thermal projects, about 9% from hydro
projects and rest is contributed by other sectors.
As per the management, there is a firm policy taken by the Board,
not to make any further investments in equity in any projects.
Currently, the company has equity investments in 4 projects. Details
are as under:
1) RS India Wind Energy Project comprises of 2 parts, Phase 1 being
41 MW is commissioned and operating at healthy PLF. While Phase 2
which is of 58 MW is yet to commission. The management of RS India,
misrepresented facts on commissioning of the project. Infact the
project was supposed to get commissioned in 2011, but there has been
a continuous delay and no intent of the management to start the
project. Hence on a prudent accounting policy, management has
voluntary made provision of about Rs 61 crore, which is a full
provision of the equity investments made by PFS.
2) India Energy Exchange is fully operational and is operating at
healthy PLF. PFS holds 5% stake in the company and there are no near
term plans to sell off the stake.
3) Ind Barath Energy is a 700 MW project in which PFS has invested
about Rs 105 crore. The project is on track and will get
commissioned in around 6 month's time from now.
4) East Coast Energy project is a 1320 MW project in which PFS has
invested around Rs 133 crore. There is a cost overrun in this
project and promoters are not able to bring in their equity portion.
So while construction activities are in progress there is a delay
and some concrete update will be available by the end of FY'16.
Restructured assets comprises of a total of Rs 400 crore. Rs 200
crore relates to actual Restructured assets and remaining Rs 200
crore comprises of DCCO (date of commencement of commercial
operation) projects, wherein RBI have allowed the Thermal power
projects which have yet not commissioned till date, a time period of
2 more years before treating them as restructured. Still PFS, on a
conservative estimate, has provided about 5% of these Rs 200 crore
projects. The remaining Rs 200 crore projects comprises of 3
projects namely:
Konaseema Gas based power project in which PFS has provided for
about Rs 116 crore of loans, another Rs 15 crore loan to a wind
power project and about Rs 60 crore loans to another project.
Konaseema is located in A.P and due to delay in gas; the project is
not able to operate. The entire project is well maintained and is
ready to operate but for gas. There is a bid for gas supply coming
up in July'15 in which the project will also participate and if gas
comes, the project will be operational. If not, then entire project
will be an NPA. PFS conservatively has already provided around 15%,
ie around Rs 20 crore as Provisions for Konsaseema project in FY'15.
Remaining projects, management expects things are on track and will
be sorted out very soon and there is very less likelihood of these
projects going NPA.
Management for the first time did not give any guidance on loan book
growth. While they were optimistic, looking at the current
uncertainty and delay in Government decisions etc, they want to be
more conservative.
Other income component would gradually increase as the share of
processing fees, management fees and structured fees etc would
increase as the loan book pie increases.
Overall, management continues to be optimistic going forward with a
clear thrust on renewable energy.

See this article on SEB's going bankrupt - the issue is counterparty risk for borrowers of PFS. Being in TN,, I can tell you that 8-9 months of delay in payment is normal and for one to get the cheque out, 3-5% greasing is also required. This is real stuff on the ground.

Too many people get carried by the macro story - I think a little bit of of kicking of tires on the ground is required.

Saddledwith mounting losses, the Rajasthan State Electricity Board (SEB) today askedbanks to consider a second round of restructuring for a colossal Rs.550bn.Merely two years after the execution of an Rs.380bn restructuring package, thesecond restructuring request raises serious concerns on a) the perception ofrestructured SEB assets being watertight viz. perpetually being classifiedstandard and a near zero likelihood of being classified NPA b) other lossmaking SEBs following suit. With the RBI taking an unequivocal stand on theissue of not extending regulatory forbearance beyond FY15 and the preferencefor a quick clean-up of banks’ balance sheets, we believe special dispensationon a second round of restructuring is unlikely. In the worst case scenario ofall restructured SEBs eventually turning NPA, we foresee 4-49% erosion tocurrent FY16/17 ABV estimates, with Canara Bank, Bank Of India, Punjab NationalBank and South Indian Bank being the worst affected.

Under theaegis of the Financial Restructuring package (FRP) implemented in October 2012,~Rs0.6tn of short term loans to SEBs was restructured by Indian Banks, with athree year moratorium. The restructuring package was to be accompanied by steeptariff hikes, reduction in AT&C losses and improving collectionefficiencies all aimed at restoring the financial health of SEBs. Inadequatetariff hikes (between 8-20%) over FY12-FY15, political apathy in view ofimpending state polls and continued AT&C losses have failed to yield thedesired results – SEB losses for FY14 remained steep at an estimated Rs.700bnas against Rs.920bn in FY12. Given that the FRP was in essence ‘substitution ofa short term loan with an additional long term loan’ and bereft of any interestbenefit, we had cautioned investors on the fragility of the package, pointingout that the FRP was only a rehash of a similar bailout package executed in2003.

We wouldlike to highlight the live risk of possible SEB defaults adding to an alreadyprolonged asset quality down cycle. Classifying SEB exposures as NPA wouldbring forth a snowball effect of falling NIM, higher loan loss provisioning,NPV diminution, increasing need for capital infusion and a 4-10bps decline inFY16/17 RoA. Amongst the PSU pack, only State Bank of India remains relativelyinsulated, with BOB coming in second best. We make no changes to ourrecommendations and remain negative on PSU banks.

We recommended PTC Financial at the price of Rs. 34 per share in July’14 (click to read the first report) PTC Financial based on its strong growth prospects in the energy sector. Post that, the new Government announced its mega plans to increase investments in renewable space. Based on that, we further recommended accumulating at Rs. 55 levels with time horizon of two years – PTC Financials:

Renewed Opportunity. Recently, the company reported weak set of results for Q4FY14 on account of slower growth and deterioration in asset quality. Detailed analysis of the issue suggests that these may be one-off in nature and company will return to normal profitability from next quarter. The sharp fall in stock price could be used as an opportunity to BUY by investors who missed buying earlier. The existing shareholders can continue to HOLD the stock or add some more of it.

Asset Quality Deterioration Confined to Four Problem Accounts The company reported provisions of Rs. 110 crores for the full year FY15 as against Rs. 22 crores in FY14. This was largely due to four problem accounts – RS India, Konaseema Gas, I-Comm and Shalivana Wind. Below is the detailed explanation on the same. Even if we were to assume that the entire exposure to these four projects is written off, it results in additional provisioning of Rs. 140 crores. This can be more than off-set by the potential gains that PTC Financial can realize in its investment book and P&L could remain unaffected. Additionally, there are four more projects with exposure of Rs. 200 crores that have been restructured as per RBI’s new dispensation. While they do not pose immediate asset quality risk, we remain vigilant about the same.

Growth to Resume from Q1FY16, albeit at a Slower Pace than previously Envisaged The company missed its loan book guidance of Rs. 7,500 crores and could only manage to build a loan book of Rs. 6,400 crores. This was largely due to Rs. 700 crores of pre-payments that happened in Q4FY15. While there are reports of competition intensifying in the space, we believe that PTC Financial’s small size and early mover advantage will ensure 25-30% loan book growth for the next few years (earlier thought to be doing higher that this). We also expect some policy announcements from the government to give a boost to investments in the renewable space.

PTC India Financial Services Ltd has informed BSE that the Board of Directors of the Company at its meeting held on July 07, 2015, has appointed Dr. Ashok Haldia ( currently working as Whole-Time Director of the Company) as the MD & CEO of the Company with immediate effect.

Surprisingly, The press release dated 31/7/15 doesn't mention the ROI at which this exit is made. PR being dated 31/7/15, I'll assume that the exit is done after June, in which case, It won't be covered in this quarter nums.